The Commission has discretion about which complaints or applications for determinations it
investigates. To determine whether an issue will be investigated and to prioritise the
investigations, the Commission has developed a set of investigation and enforcement criteria.
These criteria, that apply to the DIR Act, have been drawn from the Commission’s general
investigation and enforcement criteria. Where a complaint relates to the Commerce Act
1986, the Electricity Industry Reform Act 1998, or the Fair Trading Act 1986, the relevant
criteria for that act will apply.

The Investigation Criteria are applied to all applications for determinations and
complaints and enquires that come to the Commissio n’s attention. The criteria are used as
the basis for selecting matters for investigation.

If an investigation produces evidence of a breach of the DIR Act a further set of criteria, the
Enforcement Criteria, is applied in order to decide what would be the most
appropriate outcome.

Where an investigation establishes that there has been a breach of the DIR Act, one of three outcomes may result:

• a warning letter;
• a Commission settlement; or
• court action.

DIR Act Investigation Criteria
The Investigation Criteria are applied to all prima facie breaches of the DIR Act that come to the Commission’s attention. In order to be investigated, a matter must come within at least one of the following criteria:

Major impediment to the efficient operation of dairy markets in New Zealand
This includes matters where:

• issues on entry and exit of farmers to and from the market or other market behaviour that has a major impact on the efficient operation of dairy markets;
• issues on the access to raw milk by independent processors that significantly impedes
  competition in dairy markets;
• issues related to Fonterra’s obligation to disclose information on its business that has a major impact on the efficient operation of dairy markets; or
• conduct by Fonterra that prevents The Tatua Cooperative Dairy Limited or Westland
  Cooperative Dairy Co Limited from establishing their own export marketing arrangements, should they decide not to amalgamate with Fonterra.

Blatant Disregard for the Law
This includes matters where:

• there has been previous enforcement action against Fonterra for similar issues;
• there are indications of on-going anti-competitive conduct, eg from complaints received or from other sources;
• there is prima facie evidence of deliberate anti-competitive conduct; or
• there is a breach of a precedent established by a court decision or a previous Dairy Determination by the Commission.

Precedent
This includes matters where successful penalty action could result in:

• establishing a legal precedent;
• clarifying a legal precedent;
• extending a legal precedent; or
• changing a legal precedent.

Appropriateness of Commission Investigation
Once it has been decided that a matter falls within one or more of the above criteria and
should be investigated it is essential to decide whether it is appropriate and/ or possible for
the Commission to investigate the matter. The factors to be considered at this point are:

• whether the matter would be more appropriately dealt with by another organisation (such as Fonterra’s Shareholders’ Council-appointed Milk Commissioner) or by private action;
• whether the Commission can deal with the matter practically and efficiently through
  enforcement action; and
• whether the outcome in the relevant market(s) would justify investigation of the matter.

DIR Act Enforcement Criteria
In deciding what action should be taken if an investigation produces evidence of a breach of
the DIR Act the following matters are considered:

• the strength of the available evidence;
• the extent and significance of the impact on the efficiency of operations and competition in dairy markets;
• the seriousness of the effect on dairy market participants;
• the impact that enforcement action would have on the competitive situation and the
  efficiency of operations in dairy markets;
• possible corrective action by Fonterra;
• whether the conduct is a conscious and deliberate breach;
• disregard for Commission policy statements;
• precedent value; and
• significant educational or deterrent effect.

Once a matter has been investigated, the likely outcome is considered together with the
enforcement criteria to ensure best use is made of available resources. There are three main
outcomes where enforcement action is taken – a warning, a Commission settlement or court
action.

Warning
A warning informs the person that the conduct in question is at risk of breaching or does
breach the DIR Act. It will generally take the form of a phone discussion or meeting with the
person followed by a letter describing the conduct the Commission believes is at risk of
breaching the DIR Act and the reasons for this opinion. The aim of a warning is to persuade
the person or company to cha nge their conduct.

A warning may be issued if there is evidence that a breach of the Act may have occurred and:

• the breach is not deliberate;
• it is an isolated incident; or
• the breach is not significant enough to require a settlement or court action.
  

Warnings may be publicised.

Commission Settlement
A settlement may be entered into if:

• there is sufficient evidence to show that the DIR Act has been breached;
• a real change in the person’s conduct can be effected;
• a better outcome in dairy markets can be achieved through settlement than court action; and
• there is an admission of a breach of the DIR Act.

A Commission settlement involves the person signing an undertaking to alter its conduct so
that it no longer risks breaching the DIR Act. The undertaking may also cover such matters
as:

• staff training;
• introduction of a compliance programme; and
• admission of a breach of the DIR Act.

All settlements are publicised by the Commission.

Court Action
Court action is likely to be undertaken where:

• a precedent is sought;
• Fonterra has contravened the Act despite a previous warning or settlement;
• there has been a conscious and deliberate breach of the DIR Act;
• there is extensive detriment to competition or efficiency of operations in dairy markets; or
• Fonterra has refused to enter into a settlement, or has not complied with a settlement.
  

These are, however, not the only circumstances under which court action will be taken. The
decision to take court action is only entered into after the matter has been considered in terms of the enforcement criteria.